Stifel Downgrades Trex Company As Valuation Remains Too High

Despite having posted strong fourth quarter sales and earnings, and having guided an encouraging 2015, Trex Company, Inc. TREX saw its stock downgraded at Stifel on Wednesday morning, from a Buy to a Hold, on its valuation. Trading above $48, surpassing Stifel’s most recent target price of $46, the valuation “looks stretched,” the firm says.

Despite the demotion, the research firm boosted its EPS and revenue estimates for fiscal 2015 and fiscal 2016. It now expects EPS of $1.82 (up from $1.61) for 2015, and $2.34 (up from $2.00) for 2016. Revenues are projected at $464.3 million (up from $455.9 million) for 2015, and $539.3 million (up from $525 million) for 2016.

The firm is modeling EBITDA of $105 million, which puts the stock at 14.5x EBTIDA estimate. The report states that, while the analysts “see the potential for EBITDA to expand to as much as $110-115 million,” they would note “a still high multiple on that earnings level,” since building products peers are trading closer to 10-11x one year forward EBITDA. The specialists “believe that Trex is deserving of some premium, but in order to justify a Buy rating at these levels, we [the analysts] would not be comfortable with the necessary multiple on our estimate to get to 10-20% upside.”

On top of the full valuation, Stifel is concerned about the “longer range opportunity for the commercial polyethylene business. The main thesis behind that business is offering commercial polyethylene users a cost advantage by combining virgin material with Trex’s recycled material. With oil prices driving virgin polyethylene costs down, the cost advantage narrows somewhat.”